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Case Studies

AR and Inventory Collateral Due Diligence of New ABL Borrower

Business Issue

Our Client, a middle market bank, sought to issue an asset based loan based on AR and inventory collateral, to a multinational medical device manufacturer, headquartered in the Midwest. The loan was intended to fund working capital and a potential acquisition. At the bank’s request, Riveron performed procedures on the borrower’s US wholesale AR and inventory, US retail inventory, Canadian AR and the Target’s AR.

Riveron Approach

A Riveron team of three professionals visited the borrower’s headquarters and warehouses to obtain and understand necessary data and completed testing procedures to evaluate the borrower’s eligible assets. Procedures for the Target’s and Canadian operations were performed remotely.

Working with a management team which lacked experience in ABL lending, Riveron created ineligible waterfalls for the borrower’s AR and inventory, as well as the Target’s AR and summarized the eligibility in the borrowing base calculation. The AR waterfall was calculated utilizing AR aging reports by customer, and the inventory waterfall was calculated using inventory perpetuals by sku and location.

Benefit to our Client

Riveron completed and provided a comprehensive collateral exam report, highlighting the borrower’s availability and potential risks to the client in the event of a liquidation scenario.

Riveron calculated the borrowing base two ways: as if the potential transaction closed, including the Target’s AR; and excluding the borrower’s Target related AR, and on a stand alone basis. The separate calculations provided the bank all necessary Credit Committee data in one report, so the borrower could proceed quickly with the loan regardless of the transaction’s status.

Our team was able to quantify and concisely document the risk related to the borrower’s refund program, which provided the bank with understanding of potential exposure around the borrowing base. Similarly, Riveron calculated an AR dilution reserve based on the borrower’s substantial AR credits, which also helped to minimize our client’s exposure.